A. LEGISLATION AND RULES

A.1       Legislation

International arbitration in Canada is, for the most part, a matter of provincial jurisdiction. Each province and territory has enacted legislation adopting the UNCITRAL Model Law, occasionally with slight variations, as the foundational law for international arbitration. Canada’s federal Parliament has also adopted a commercial arbitration code based on the UNCITRAL Model Law, which is applicable when the federal government or one of its agencies is a party to an arbitration agreement or where a matter involves an area of exclusive federal jurisdiction under Canada’s constitution. In addition, each of the provinces and the federal government has adopted the New York Convention.

In 2014, the Uniform Law Conference of Canada (“ULCC”) adopted an amended Uniform International Commercial Arbitration Act (“Uniform Act”), updating Canada’s laws relating to international commercial arbitration in accordance with the 2006 UNCITRAL Model Law amendments. The amended Uniform Act is open for adoption into federal and provincial legislation.

To date, two Canadian provinces have adopted the 2006 amendments to the UNCITRAL Model Law, which offer a more flexible interpretation of some of the more rigid requirements of the New York Convention. In 2017, Ontario adopted the amendments with the International Commercial Arbitration Act1 ( “Ontario ICAA”). British Columbia followed suit in 2018, amending its International Commercial Arbitration Act2 (“BC ICAA”). Whereas Ontario attached the UNCITRAL Model Law as a schedule to the Ontario ICAA, British Columbia incorporated the 2006 amendments directly into the BC ICAA along with other developments, including a higher threshold to successfully challenge an arbitrator and broad powers for tribunals to grant interim measures and preliminary orders.

The legal framework for investor-state arbitration in Canada is evolving. Canada is a party to 37 BITs, known as Foreign Investment Promotion and Protection Agreements, which contain investor-state arbitration provisions. In May 2021, the Government of Canada revised its model Bilateral Investment Treaty, the Foreign Investment Promotion and Protection Agreement Model3 (“Model FIPA”). On 1 July 2020, the United States-Mexico-Canada Agreement (USMCA) came into effect. Ratified by the United States, Canada and Mexico, the USMCA is the successor to NAFTA. The USMCA phases out the investor-state dispute resolution process between the United States and Canada that was contained in Chapter 11 of NAFTA. The USMCA also restricts access to international arbitration for most foreign investors who are not party to a “Covered Government Contract”. Most foreign investors must exhaust their remedies in local courts before initiating arbitration. Canada is a party to the Canada-European Union Comprehensive Economic Trade Agreement (“CETA”) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”), both of which contain provisions for investment arbitration.

A.2       Institutions, rules and infrastructure

Canada remains a jurisdiction that strongly supports international arbitration, making major Canadian cities like Toronto, Vancouver, Calgary, Ottawa and Montreal a welcome “seat” of arbitration. Canadian organizations such as the Chartered Institute of Arbitrators Canada Branch, the Toronto Commercial Arbitration Society, the Western Canada Commercial Arbitration Society and Young Canadian Arbitration Practitioners are dedicated to the continued awareness and promotion of arbitration. The Canadian Arbitration community holds Canada Arbitration Week4 every Autumn.

Canada is distinct in having a dual heritage of common law and civil law (in the province of Québec). Canada offers highly regarded international arbitrators and experienced arbitration counsel. It has excellent hearing facilities, quality interpretation and translation services, modern and efficient transcription services and highly qualified experts. It also has a stable political system and reasonable visa entry requirements. Local arbitration institutions in Canada include ADR Chambers, the ADR Institute of Canada, ICDR Canada and the Vancouver International Arbitration Centre. Canada has also attracted the presence of renowned international institutions that have partnered with Arbitration Place, a hearing venue with resident arbitrators in Toronto and Ottawa. These include the International Institute for Conflict Prevention and Resolution, ICDR, the ICC International Court of Arbitration, ICC Canada and the LCIA.

Canadian practitioners, arbitrators, organizations and companies serving the arbitration sector offer robust virtual hearing services.

B. CASES

B.1       The British Columbia Court of Appeal confirms that the correctness standard should apply to the review of international arbitral awards under ICAA section 34(2)(a)(iv)

In lululemon athletica canada inc. v. Industrial Color Productions Inc, 2021 BCCA 428 the British Columbia Court of Appeal held that the correctness standard is the proper standard of review on an application to set aside an arbitral award under section 34(2)(a)(iv) of the BC ICAA.

B.1.1    Background

In 2017, lululemon and Industrial Color Productions Inc. (ICP) entered into a services agreement pursuant to which ICP agreed to provide photography production services to lululemon under various statements of work, and lululemon paid ICP per product. Under the statement of work, the initial term was to automatically extend for consecutive 90-day terms unless either party provided written notice of termination prior to 75 days before the end of the initial term or the end of any extension.

Lululemon gave notice to ICP terminating the services agreement pursuant to the provisions of the statement of work, however, the parties were unable to resolve the issue of whether lululemon owed any amounts to ICP as a result of the termination. ICP commenced an arbitration with the ICDR in accordance with the services agreement, seeking a declaration that lululemon breached the services agreement by giving improper notice to terminate and seeking general damages for the 75 days following the expiry of the initial term.

B.1.2    ICDR Arbitration

The arbitrator identified the issue between the parties as “the commercial consequences of [lululemon’s purported] termination” of the services agreement. The arbitrator awarded damages to ICP based on its contractual minimum shortage to the end of the initial term of the statement of work. The arbitrator also found that lululemon’s termination of the services agreement was improper, as it could not be terminated until 75 days after the expiry of the initial term. The arbitrator accordingly awarded ICP damages for lululemon’s “premature termination”.

B.1.3    BC Supreme Court Decision

Lululemon applied under section 34(2)(a)(iv) of the BC ICAA to set aside the arbitrator’s award, which mirrors the language of article 34(2)(a)(iv) of the UNCITRAL Model Law. The chambers judge applied the reasonableness standard of review and upheld the ICDR award on the grounds that the arbitrator’s conclusions were reasonable and should be accorded deference.

In deciding to apply the reasonableness standard, the chambers judge court took note that a common international approach to the standard of judicial review of jurisdictional rulings by arbitral tribunals under the UNCITRAL Model Law had not yet been developed. As a result, the chambers judge held that the reasonableness standard should apply as it best supported the goals of preserving the autonomy of the forum selected by the parties and of minimizing judicial intervention. The chambers judge distinguished the Ontario Court of Appeal’s United Mexican States v. Cargill, Inc., 2011 ONCA 622 decision (“Cargill”), holding that the correctness standard was inapplicable, as it involved a breach of NAFTA and was, therefore “foundationally different” from the ICDR award.

The chambers judge also held that the arbitrator’s competence to rule on his own jurisdiction under section 16 of the BC ICAA supported the application of the reasonableness rather than the correctness standard. The reasonableness standard also best aligned with the standard of review framework set forth in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 (“Vavilov”) for judicial review of a decision of a statutory tribunal and the general framework for domestic commercial arbitration as set out in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (“Sattva”).

B.1.4    BC Court of Appeal Decision

The BC Court of Appeal dismissed the appeal and upheld the arbitrator’s decision, but noted that the chambers judge had applied the incorrect standard of review. The chambers judge had erred in applying the reasonableness standard, as the correctness standard should apply to the review of arbitral awards under section 34(2)(a)(iv) of the BC ICAA.

The court found that Cargill remains the leading Canadian case on the issue, which established that the correctness standard of review applies to applications to set aside awards under section 34(2)(a)(iv) of the BC ICAA. While the Cargill decision involved a damages claim against a country for breaches of an international multilateral trade agreement, the facts were not so divergent as to justify a departure from the Court of Appeal’s ruling in that case. The Ontario Court of Appeal in Cargill had conducted a fulsome analysis of the tension between discouraging court intervention and preserving arbitrators’ powers to rule on their own jurisdiction and had appropriately concluded that the correctness standard should apply under section 34(2)(a)(iv) of the BC ICAA.

The language of the BC ICAA also supported the application of the correctness standard, as the legislation itself significantly limited the scope of judicial intervention to matters specifically identified in the legislation. Section 34(2)(a) requires an applicant to “furnish proof” that one of the grounds for setting aside an award had been established and section 32(2)(b) requires the court to make findings regarding the grounds identified in that section. A reading of both of these provisions suggests a de novo hearing before the reviewing judge. While section 16 of the BC ICAA does empower arbitrators to rule on their jurisdiction, this alone is not sufficient to support a reasonableness standard of review.

Courts in UNCITRAL Model Law jurisdictions have also generally adopted a de novo standard of review under UNCITRAL Model Law articles 16(3) and 34(2)(a). The court pointed to case law from other UNCITRAL Model Law jurisdictions, including the UK, the US, New Zealand, Ireland and Hong Kong to support this proposition. The court held that international consistency is not only desirable but called for by section 6 of the BC ICAA. As such, Canadian courts should follow suit and apply the correctness standard to preserve international consistency.

The court further confirmed that the domestic precedents Sattva and Vavilov concerning the standard of review of decisions by statutory tribunals were not helpful in the context of an application to set aside an arbitral award on jurisdictional grounds under the BC ICAA. Namely, Sattva only concerns the standard for an appeal from a domestic arbitration and Vavilov is confined to the applicable standard in administrative law and does not address the field of arbitration.

B.1.5    Significance

This case is significant because it confirms that the standard of review is correctness for applications to set aside an international arbitration award before Canadian courts under section 34(2)(a) of the BC ICAA. This case came after both the Sattva and the Vavilov decision brought some uncertainty to the applicability of the standard of review established in the Cargill case. This case also brings Canadian jurisprudence in line with other UNCITRAL Model Law jurisdictions, preserving international consistency when it comes to the standard of review of arbitral decisions under the BC ICAA. Cargill also remains the leading case in Canada on the standard of review to challenges to arbitral decisions under the BC ICAA. Sattva and Vavilov should not be applied to applications to set aside international arbitral awards under the UNCITRAL Model Law or the New York Convention. Going forward, applicants can anticipate that courts reviewing arbitral awards will apply the correctness standard.

B.2       The Ontario Court of Appeal provides guidance on the prohibition of appeals with respect to preliminary jurisdictional questions under article 16(3) of the Model Law

In United Mexican States v. Burr, 2021 ONCA 64 (“United Mexican States”), the Ontario Court of Appeal upheld the decision of the Ontario Superior Court declining to set aside the decision of an arbitral tribunal constituted under NAFTA. In bifurcated proceedings, the tribunal found that it had jurisdiction to hear a dispute brought under Chapter 11 of NAFTA against the United Mexican States by US nationals, US enterprises and Mexican enterprises. The Ontario courts declined to set aside the award on jurisdictional grounds, finding that the arbitral tribunal’s ruling was on a “preliminary question” of jurisdiction under article 16(3) of the UNCITRAL Model Law and that no further appeal could be made before the courts.

B.2.1    Background

Thirty-nine US nationals brought claims individually and on behalf of seven Mexican companies against Mexico to compensate for losses allegedly caused by the closure of casinos that had been operating in Mexico. The claims were brought under Chapter 11 of NAFTA. The NAFTA tribunal bifurcated the proceedings into a jurisdiction phase, and a merits and damages phase. A majority of the tribunal found that it had jurisdiction over all but one of the parties’ claims. Mexico applied to the Ontario Superior Court to set aside the tribunal’s decision under section 11 of the International Commercial Arbitration Act (“Ontario ICAA”)[1] and articles 16 and 34 of the UNCITRAL Model Law.

The Superior Court dismissed Mexico’s challenge to the tribunal’s award on jurisdiction in which it found that the US claimants had properly given notice of their intention to arbitrate, holding that technical non-compliance with article 1119 of NAFTA did not vitiate the state’s consent to arbitrate. Mexico appealed this decision and the respondents moved to quash Mexico’s appeal. The primary issue before the Ontario Court of Appeal was whether Mexico’s application was governed only by article 16(3) of the UNCITRAL Model Law or whether article 34 applied to the appeal. A finding that article 16(3) applied would prohibit an appeal of the application judge’s decision, while article 34 would permit an appeal.

B.2.2    Ontario Court of Appeal Decision

The Court of Appeal quashed the appeal without addressing the merits of the Superior Court decision. Instead, its ruling focused on whether it had jurisdiction to hear the appeal. The Court concluded that article 16(3) of the UNCITRAL Model Law precluded an appeal of the decision rendered in the first instance.

Article 16(3) specifies how an arbitral tribunal may proceed when its jurisdiction is challenged and that parties may request that the Ontario Superior Court decide the matter. This provision also states that if the tribunal’s ruling was on a “preliminary question” of jurisdiction, the application judge’s decision cannot be appealed to the Ontario Court of Appeal. Article 34 of the UNCITRAL Model Law, on the other hand, provides for a right of recourse to a court against an award on the merits, without any limits on the parties’ ability to appeal.

The Court of Appeal held that the arbitral tribunal’s decision was on a “preliminary question” of jurisdiction, and governed by article 16(3). The tribunal’s decision did not address the substantive merits of the dispute. Rather, the merits phase was proceeding while the challenge to the Ontario Superior Court and the subsequent appeal was ongoing. The Court of Appeal acknowledged that Mexico mentioned article 34 in its submissions, but only included it in the title of its Notice of Application and made limited references to it in its factum. Mexico did not address the substance of article 34 in its oral and written submissions before the lower court. Similarly, the application judge’s ruling did not turn on the substance of article 34 and it played no role in her decision.

In a final observation, the Court of Appeal declined to decide whether it was possible for a party to “ride both horses” by relying both on articles 16 and 34 in challenging an arbitral tribunal’s decision. Despite the parties’ agreement on this issue, the Court of Appeal found it unnecessary and unwise to interpret article 34 and its interaction with article 16 in the absence of full arguments on the matter from parties committed to the opposite perspective. In this case, neither the substantive issues before the application judge nor her decision turned on article 34. Accordingly, the court relied on the language of article 16(3) prohibiting an appeal from the application judge’s decision.

Significance

This decision provides some guidance on the prohibition on appeals of preliminary questions of jurisdiction under the UNCITRAL Model Law. The Ontario Court of Appeal’s decision may have an impact on the way parties approach bifurcation and jurisdictional challenges before arbitral tribunals. Since Mexico did not rely on article 34 in its arguments before the application judge, the issue of whether parties may “ride both horses” remains unresolved.

This decision also reinforces the reluctance of Canadian courts to set aside the decisions of international arbitration tribunals. The threshold for setting aside these decisions is high.

B.3       Ontario court reverses prior decision and holds that jurisdictional challenge under UNCITRAL Model Law article 16 ought to proceed by way of a hearing de novo

The Ontario Divisional Court in The Russian Federation v. Luxtona Limited, 2021 ONSC 4604 (“Russian Federation”) reversed the application judge’s ruling and held that jurisdictional challenges under article 16(3) of the UNCITRAL Model Law were to proceed by way of a de novo hearing, where parties may adduce new evidence as of right and are not limited by the record that was before the arbitral tribunal. This decision is consistent with international trends on the issue and relied both on domestic and international authorities.

B.3.1    Background

Luxtona, a former shareholder of a Russian-based energy company, alleged that Russia violated provisions of the Energy Charter Treaty.[2] relating to the protection of investments. While Russia is a signatory of the treaty, it never ratified it and took the position that the treaty’s arbitration provisions are inconsistent with Russian law.

The parties appointed an arbitral tribunal seated in Toronto, which heard evidence and arguments on the jurisdictional issue. The tribunal found that it had jurisdiction to arbitrate Luxtona’s claims against Russia. Russia then applied to the Ontario Superior Court to set aside the tribunal’s interim award. In support of its application, Russia sought to adduce new expert evidence on Russian law that was not before the tribunal, to which Luxtona objected. At first instance, the application judge held that Russia was not entitled to file new evidence as of right, but could only do so if it met the stringent test for the admission of “fresh evidence”. Russia appealed the decision.

B.3.2    Ontario Divisional Court decision

On appeal, a three-judge panel of the Ontario Divisional Court concluded that a hearing before an application judge under article 16(3) is a hearing de novo and the parties are not restricted to the record that was before the arbitral tribunal on the jurisdictional issue.

Article 16(3) allows the Superior Court to decide preliminary questions of jurisdiction. The language of the UNCITRAL Model Law is significant because it confers original jurisdiction on the court to adjudicate the jurisdictional question. The Superior Court’s task is to decide, rather than to review, a tribunal’s decision.

The Divisional Court distinguished this case from Cargill, which held that Superior Court proceedings under the UNCITRAL Model Law are a “review” and not a hearing de novo on the basis that the proceedings in Cargill were brought under a different article of the UNCITRAL Model Law (article 32(2)(a)(iii)), which provided for a different test to be applied by the court. In Cargill, the issue was whether the award itself complied with the submission to arbitration. However, in Cargill, the Ontario Court of Appeal noted that one could view the approach of addressing an issue de novo as “a variant of applying the correctness standard”. Cargill was different from the Dallah v. Pakistan, [2010] UKSC 46 (“Dallah”) case discussed below, as the jurisdiction issue did not challenge the content of the award itself. Rather, the jurisdictional issue, in that case, addressed the tribunal’s ability to adjudicate the issue of whether one party had committed to the arbitration process.’

Dallah is the leading UK decision on this issue and stands for the proposition that the court’s role is to reassess jurisdictional issues and not review the tribunal’s decision. This international authority has been followed in many other respected jurisdictions, including other UNCITRAL Model Law jurisdictions. The Divisional Court found that the “strong consensus of the decisions from Model Law jurisdictions points to following the approach taken in Dallah.” The court saw it as “desirable that there be a measure of consistency in the approach taken to these issues across jurisdictions.” This goal is reflected in article 2A of the UNCITRAL Model Law which provides that regard is to be had to the international origin of the UNCITRAL Model Law and the need to promote uniformity in its interpretation and application.

The text of the UNCITRAL Model Law prescribed a de novo hearing to decide the matter of the tribunal’s jurisdiction. Because the court is hearing this issue de novo, the parties are entitled to adduce new evidence as of right, including expert evidence, and are not restricted to the record that was before the tribunal.

B.3.3    Significance

This case is significant because it holds that in deciding jurisdictional challenges, Ontario courts will conduct a rehearing as opposed to a review. This has important evidentiary implications for the parties involved. The Ontario Divisional Court also drew a distinction between articles 16 and 34, with challenges under article 34 proceeding as “reviews” to which the correctness standards apply. However, as in United Mexican States v. Burr, the question of whether a party may rely on both articles 16 and 34 of the UNCITRAL Model Law to challenge a jurisdictional decision of the arbitral tribunal remains unresolved.

This case will also have important repercussions in the rest of Canada, since every Canadian province, with the exception of Quebec, has adopted the UNCITRAL Model Law.

 

The authors thank articling students Eleanor Dennis and Juliette Mestre for their valuable contributions to this chapter.

[1] SO 2017, c 2 Sch 5.

[2] 20 May 2015.

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